Lately, a few companies have started to offer a “miracle” service, according to which, by incorporating a UK-based company and transferring the property into it, you can avoid not only Spanish Inheritance Tax, but also, if you so wish, Capital Gains Tax (in case you sell) and transfer tax (for the buyer of the shares). Interestingly, Mr. and Mrs. Hore, currently being charged by the Prosecutor with tax fraud (in Spanish), together with their ex-lawyer (already convicted on a separate case as jointly liable), did exactly the same, albeit with offshore entities, and are facing between 15 and 20 years imprisonment.

The company more actively operating this scheme, which boasts having invested over a hundred thousand pounds on an online bespoke Case Management System (the word “bespoke”, associated to a service or product, generally makes me shiver), is aggressively promoting a campaign, with the legal endorsement of some lawyers, to persuade property owners to forget everything they have been told or read in relation to the matter and dive into untested waters. That is, dive into what the Spanish Tax Office Tax-Fraud Prevention Plan considers asfiscal engineering, abusive tax-planning or anomalous business arrangements (point 2.1.h of the Plan), in particular in respect to organizations that are called “company nests”, whose only purpose is to incorporate and sell companies that are then used to conceal property (point 9.1.5. of the Plan).

Unfortunately, these types of all-encapsulating tax-avoidance schemes not always have the desired effect (equity release turned total investment fiascos), but in fact occasionally end up having totally undesired consequences for both the promoters and the beneficiaries (which include prison sentences).

So what we are now being told, by the company Wincham Investments primarily, is that, by incorporating a UK Limited Liability Company, one is exempt from having to pay IHT altogether, when one inherits. This statement, which I find mistaken (for the reasons I explain), is a result of prior misconceptions the “conceiver” of the scheme abounds with. Excerpted from their sales literature, these can be summarised as follows:

Wincham Investments claims: owners do not understand that their Heirs and their Estate will pay IHT in two jurisdictions…it therefore should not be assumed that one tax can be offset against the other as they are both totally different taxes on totally different entities. I claim: Article 47 of Rd 1629/1991 (Inheritance and Gift Tax Royal Decree)stipulates that a resident tax payer will have the right to deduct, from the final tax due, the sum paid on an equivalent tax, abroad. Non-residents are not allowed to follow this procedure, as they should claim this in the jurisdiction where they are residents. Wincham also talks about double taxation agreements, but it does not clearly mention that there is no such agreement in place between Spain and the UK (in fact, Spain has only signed 3 of such agreements, with France, Greece and Sweden). But if we investigate further, we find that HM Revenue and Customs stipulates that unilateral relief is applicable where no double taxation agreements are in place, which means that the UK will give credit to the amount of tax paid in Spain.

Wincham claims: under EU Treaties a UK Company is only taxed in one jurisdiction, the UK. I claim: Yes, probably, unless that company has been incorporated solely with the intention of holding Spanish property, and I base my opinion on the following:

Law does not support the abuse or the anti-social use of it (Article 7 of the Spanish Civil Code).This old and basic, yet crucial, legal precept is being invoked by the Spanish Prosecutor in large fraud cases involving offshore companies, and Judges are upholding it, where they are used to evade payment of taxes.

Resident tax payers will be obligated to pay taxes on goods and rights received by way of inheritance or gift, wherever these are situated. This would include foreign companies (Article 17 of Rd 1629/1991 Inheritance and Gift Tax Royal Decree). In addition, Article 18 stipulates that anyone not included in article 17 will have to pay taxes on goods and rights, of any nature, that were situated, were susceptible of being exercised or should be carried out in Spanish territory. Article 17.2 specifically stipulates that the following will be deemed as situated in Spanish territory: Real Estate.

Capital Gain Taxes obtained, directly or indirectly, from property situated in Spain, will be taxed in Spain (Non-Resident Act 5/2004). In particular, the following gains are included: when they are originated or derived from rights or shares of a company, resident or not, whose assets are made of up of, primarily, directly or indirectly, property based in Spain. The gains obtained from transferring the shares of a company, resident or otherwise, that attribute its ultimate owners, the right of enjoyment of Spain. By extension, we can easily conclude that property changing hands via a UK Company would be taxed in Spain, and not abroad, unless the Spanish legislators envisaged 2 different tax treatments for what is essentially the same thing, transferring property through transfer of shares.

Liability of the people involved with companies deemed fraudulent by the Tax Office. (article 43 of the Ley 58/2003 General Tributaria): Point g) refers to the liability of persons or entities that have the effective control, total or partial, direct or indirect, of the juridical persons (companies) or in which there is a shared or joint decision making process, when it is verified that the juridical persons have been created or utilized in an abusive or fraudulent manner with the purpose of eluding the patrimonial universal responsibility in respect of the Tax Office, and there is a uniqueness of people and economical or financial spheres, or confusion or diversion of assets.Point h)refers to the liability of the persons and entities of which the tax payer is in control of, partially or totally, directly or indirectly, for the tax obligations of the taxpayer, when it is verified that the juridical persons have been created or utilized in an abusive or fraudulent manner with the purpose of eluding the patrimonial universal responsibility in respect of the Tax Office, and there is a uniqueness of people and economical or financial spheres, or confusion or diversion of assets Although both scenarios seem similar they are quite distinct since one refers to the people in charge of the companies that are used to defraud, and the other the companies that are under the control of the defrauding taxpayer.Note that these 2 points have been enacted, and added to the previous law, by virtue of the more recent 2006 Act onPrevention of Tax Fraud(Ley 36/2006, de 29 de noviembre, de medidas para la prevención del fraude fiscal).All of which sounds too symptomatic of a specific intent to curtail tax evasion by using companies.

Using companies for a purpose other than trading. There is abundant Supreme Court case law, but, in essence and for the sake of brevity, what the Supreme Court is against is the utilization of companies for the purpose of achieving a result distinct fromthe normal and genuine purpose of incorporating one, which is to trade. There are references to the fraudulent use and abuse of companies in many instances, the artificial creation of juridical entities or the mere appearance to obtain a result contrary to law, fictitious entity, inconsistency of juridical person, instrumentation, mere formal juridical personality, confusion of personalities, substantial confusion and identity etc. If we put our Joe Bloggs hat on, what would we think if one someone transferred his property into a company and next day sold it? Indeed, it would strike us as rather hanky-panky.

Wincham claims:Whilst the Statue of Limitations on Taxation in Spain is 4 years this would not be relevant if the Spanish Government could subsequently prove a fraudulent non-disclosure had taken place. There is no such Statute of Limitations for fraud, and therefore, there is a very real risk the Spanish Authorities would claim that there was deliberate criminal withholding of information and thereby enforce the Tax retrospectively. Misuse the Statute of Limitations in this manner is a criminal act and highly dangerous method of Tax evasion – not to be advised! …Whilst this is possible and we have seen Probate cases where the Taxes have been evaded in Spain by employing this methodI claim:Christ, what a load of mumbo-jumbo!

Firstly, the Statute of Limitations on Tax is so protected that, according to Spanish Supreme Court case law (STS 12 November 1998), the recognition and enforcement of the “prescripcion“, as it is called in Spain, is an obligation of the Spanish authorities that cannot even be waived by payment of the tax, after the period has elapsed (not that anyone would want to, but it has happened, by mistake!). The above Court ruling says that once you win the “prescripcion” the authorities will have to accept it “ex officio“, that is, as an official obligation. This applies whether you owed them 10 Euros or 10 million Euros, even if they missed you by 1 day…(that is, 4 years and 1 day counting from the last day to voluntarily pay the tax).

Secondly, they claim that one is committing a fraud if you utilize the Statute of Limitations: well, this is exactly what it was meant for as, otherwise, why enact this law? But for the sake of argument, if we assumed the contrary, how can you commit a fraud if you have not formally accepted the inheritance? In other words, how can you ever be liable for payment of taxes on something you have never accepted as being yours, even if someone wants you to be an inheritor by naming you on a will?

Thirdly, they have invented a new type of fraud, the fraud of non-disclosure, according to which not telling the tax office that you may be interested in inheriting would amount to a deliberate criminal withholding of information as a result of which they would enforce the Tax retrospectively. This extraordinary concept must have been coined by their bespoke Case Management System, unless it is a typing error by the RTN paper printers, or so I would like to think. Some serious clarification required her, please.

Fourthly, although the word “fraud” is clear, it can be confusing: under Spanish law, not paying taxes would either be described as a fiscal infraction (minor, serious or very serious) for tax frauds under €120,000 per fiscal year, or tax crime, if it is over € 120,000 per fiscal year. In the latter case, the statute of limitations is 5 years, provided you have been caught within the 4 years mentioned above (as otherwise there would not be a valid base for a claim, according to Supreme Court case law /STS 10 October 2001).

Wincham claims (connected to the previous point): Every year the registered owner of the property has to submit annual Tax Declarations to the Spanish Government, this is very difficult for a deceased person to do and we are aware that the Tax office is looking closely at properties and levying hefty fines where annual tax submissions have not been submitted. I claim: Yes, paying taxes after you have answered your last call is huge task, surely! The above silly statement intends to hide the known fact that non-resident income tax is probably the less important and least interesting tax for the Spanish Tax Office (particularly in terms of the revenue it brings), so much so that they only attempt to collect it when you decide to sell your property. We submit thousands of declarations every year, and do it electronically, in batches, without knowing if the property owners have or have not paid the tax previously (unless we have helped them), are living in Spain, abroad, or are indeed still alive. All we get from the tax payers is a transfer with an instruction to pay the tax. Not once has the tax office enquired about any of the tax declarations we have submitted on behalf of our clients, they just cannot possibly monitor each calculation. So yes, anyone can pay it, not a problem. Full stop.

In summary, in the opinion of this blogger, using a UK company incorporated purposely is not a real, valid or legitimate vehicle to circumvent the obligation to pay Inheritance Tax in Spain, unless of course, as it generally happens, the Tax Office does not find out of the death of the owners of the shares, in tax-time, and therefore the maligned 4 year Statute of Limitation kicks in, after all!

I have a spanish property and paid wincham investments £5000 ands more to invest it into a company. I now find it is costing me more to keep in a company with winchams than I thought. I now want to live out there and want to put it back in my name. Can I do this ? How can I do this?? and what would be the cost ?? many thanks Rogers

It is not a problem to transfer the property from company to direct ownership. This has to be done though via liquidation of the company so that you only pay 1% Stamp Duty in Spain, plus notary, land registry and legal fees. If you were to transfer it without doing this, you would have to pay 7% transfer tax (8% for the value exceeding 400.000 Euros, in Andalucia), plus corporation tax if you show a profit.

The deeds of liquidation can be done in the UK, through a Notary Public. They are legalised in London (www.fco.gov.uk), translated and then can be either registered directly with the land registry or put on a Spanish deed, if the district registrar requests this (registrars are sometimes like 19th county sheriffs, too much power!).

SPANISH INHERITANCE TAX
My research into our inheritance tax concerns showed us that Wincham should be taken very seriously, we have experienced firsthand their professionalism and excellent knowledge of both jurisdictions. The Wincham process was straightforward from start to finish and was concluded efficiently, communication was excellent between their staff in Spain and the UK, and they really understood our situation. We are therefore surprised by your comments, as we understand they have been shortlisted for the AIIP Awards 2011 [Association of International Property Professionals] for ‘MOST OUTSTANDING EXAMPLE OF CUSTOMER SERVICE’
My husband and I would highly recommend that non-domicile property owners in Spain talk to Wincham first to experience their wonderful customer care.

I am not challenging their customer service but, as I point out on this blog post, in my opinion their advice is riddled with inconsistencies that may hide many nasty surprises. I am yet to receive an answer from them in respect of the matters raised here.

Mr. and Mrs. Hore accepted a fine of just over €5,000,000, and the lawyer accused of setting up the companies admitted to 7 counts of tax fraud for which he received a suspended sentence of 7 years imprisonment, substituted by a payment of €504,000, plus a €4,000,000 fine.

As aprt of the agreement, Mrs. Hore had to make a statement that she was indeed UK resident at the time, to avoid the criminal prosecution.